Book 4, Chapter 3
This chapter, with 20 pages, is the longest so far in the book, and I am in a bit of a hurry, so my brief comments here might not do it justice. (OTOH, it seems these posts are for my enjoyment only, so no blood no foul, right?)
§1. “An increase in the capital and labour applied in the cultivation of land causes in general a less than proportionate increase in the amount of produce raised, unless it happens to coincide with an improvement in the arts of agriculture” (p 125). From this, Marshall states that farmers initially have increasing returns to the application of labor and capital to land, but that these returns inevitably diminish as production reaches a maximum, after which point additional capital and labor investments return less value (in output) than they cost. The only way to increase production, then, is to cultivate more land (on the extensive margin), which is fine until all the “free” land is gone, which was already true in the times of the Old Testament. The only way left to increase production on the intensive margin is, therefore, to have better technology (e.g., seeds, fertilizer, machines, etc.).
§2. Marshall goes into (tedious) detail in explaining diminishing and marginal returns, using footnotes and diagrams that were — at the time of his book — revolutionary in setting “rigorous” standards. These concepts are well-known today. He also makes the interesting distinction between returns from land itself, man’s effort to improve the land, and access from the land to markets, etc. This last bit uncovers an interesting connection between private property (and effort) and collective goods such as roads and markets that help everyone.
§3. Returns to effort and capital can rise and fall over different types of land and in different stages of intensity. Some land becomes more valuable with a little effort; other land needs much more effort. In some cases, effort will “uncover” an opportunity that awards later effort. This process takes time and experimentation. Farmers know this; economists would be wise to remember it — but they have not, since today’s theory assumes returns diminish continuously, always and everywhere, once they get started.
§4. Different lands tend to converge in their values as farmers adjust the mix of crops and inputs in response to market prices.
§5. Marshal defends Ricardo’s assumption (that settlers in a new region cultivate the most fertile lands first, then move to less fertile lands) as the result of “unclear writing rather than unclear thought” since initial cultivation decisions will change over time with new knowledge — and especially when agricultural products move from own consumption to being traded in markets. In a footnote to this passage, Marshall makes a note on productivity in the tropics that applies to our climate-changing world:
But much of the apparent attractiveness of tropical countries is delusive: they would give a very rich return to hard work: but hard work in them is impossible at present, though some change in this respect may be made by the progress of medical and especially bacteriological science. A cool refreshing breeze is as much a necessary of vigorous life as food itself. Land that offers plenty of food but whose climate destroys energy, is not more productive of the raw material of human wellbeing, than land that supplies less food but has an invigorating climate. (p 137)
§6. Marshall’s description of “the commons” mentioned above (§2) is also worth quoting:
But in fact every farmer is aided by the presence of neighbours whether agriculturists or townspeople. Even if most of them are engaged like himself in agriculture, they gradually supply him with good roads, and other means of communication: they give him a market in which he can buy at reasonable terms what he wants, necessaries, comforts and luxuries for himself and his family, and all the various requisites for his farm work: they surround him with knowledge: medical aid, instruction and amusement are brought to his door; his mind becomes wider, and his efficiency is in many ways increased. And if the neighbouring market town expands into a large industrial centre, his gain is much greater. All his produce is worth more; some things which he used to throw away fetch a good price.
§7. Marshall opines on the differences between diminishing returns to land, fisheries and mines. In the cases of land and fisheries, returns can be continuous due to the renewable nature of the yields (crops and fish, respectively). He then gives a nice example of early 20th century thinking over fisheries:
As to the sea, opinions differ. Its volume is vast, and fish are very prolific; and some think that a practically unlimited supply can be drawn from the sea by man without appreciably affecting the numbers that remain there; or in other words, that the law of diminishing return scarcely applies at all to sea-fisheries: while others think that experience shows a falling-off in the productiveness of those fisheries that have been vigorously worked, especially by steam trawlers. The question is important, for the future population of the world will be appreciably affected as regards both quantity and quality, by the available supply of fish. (p138)
The population of the world today should be quite concerned: one-third of fisheries are over-fished.
Marshall’s comments on mining for non-renewable resources are also interesting. He says that mining can indeed witness decreasing returns, but not necessarily before the mine has given its entire yield.
§8. Marshall ends the chapter with a long, tedious note in which he makes two useful observations. First, there’s a difference between an individual changing their mix of land, labor and capital to maximize the productivity of each input and a nation changing that mix, since some inputs are fixed in aggregate, based on different times and places, with land being the most common. Following on this, he clarifies that Americans are not having the same discussion over diminishing returns as people in the Old World, since American lands were valued according to their market access rather than their fertility.